US Bank 2015 Annual Report Download - page 139

The inherent MSR value for the commitments are generated
by the same models used for the Company’s MSRs and thus
are subject to the same processes and controls as described
for the MSRs above. The Visa swaps require payments by
either the Company or the purchaser of the Visa Inc. Class B
common shares when there are changes in the conversion
rate of the Visa Inc. Class B common shares to Visa Inc.
Class A common shares, as well as quarterly payments to the
purchaser based on specified terms of the agreements.
Management reviews and updates the Visa swaps fair value in
conjunction with its review of Visa related litigation
contingencies, and the associated escrow funding. The fair
value of the Visa swaps are calculated by the Company’s
corporate development department using a discounted cash
flow methodology which includes unobservable inputs about
the timing and settlement amounts related to the resolution of
certain Visa related litigation. The expected litigation resolution
impacts the Visa Inc. Class B common share to Visa Inc.
Class A common share conversion rate, as well as the
ultimate termination date for the Visa swaps. Accordingly, the
Visa swaps are classified within Level 3. Refer to Note 23 for
further information on the Visa restructuring and related card
association litigation.
Other Financial Instruments Other financial instruments
include cost method equity investments and certain
community development and tax-advantaged related assets
and liabilities. The majority of the Company’s cost method
equity investments are in Federal Home Loan Bank and
Federal Reserve Bank stock, for which the carrying amounts
approximate fair value and are classified within Level 2.
Investments in other equity and limited partnership funds are
estimated using fund provided net asset values. These equity
investments are classified within Level 3. The community
development and tax-advantaged related asset balances
primarily represent the underlying assets of consolidated
community development and tax-advantaged entities. The
community development and tax-advantaged related liabilities
represent the underlying liabilities of the consolidated entities
(included in long-term debt) and liabilities related to other third
party interests (included in other liabilities). The carrying value
of the community development and tax-advantaged related
asset and other liability balances are a reasonable estimate of
fair value and are classified within Level 3. Refer to Note 8 for
further information on community development and tax-
advantaged related assets and liabilities. Fair value is provided
for disclosure purposes only.
Deposit Liabilities The fair value of demand deposits,
savings accounts and certain money market deposits is equal
to the amount payable on demand. The fair value of fixed-rate
certificates of deposit was estimated by discounting the
contractual cash flow using current market rates. Deposit
liabilities are classified within Level 2. Fair value is provided for
disclosure purposes only.
Short-term Borrowings Federal funds purchased, securities
sold under agreements to repurchase, commercial paper and
other short-term funds borrowed have floating rates or short-
term maturities. The fair value of short-term borrowings was
determined by discounting contractual cash flows using
current market rates. Short-term borrowings are classified
within Level 2. Included in short-term borrowings is the
Company’s obligation on securities sold short, which is
required to be accounted for at fair value per applicable
accounting guidance. Fair value for other short-term
borrowings is provided for disclosure purposes only.
Long-term Debt The fair value for most long-term debt was
determined by discounting contractual cash flows using
current market rates. Junior subordinated debt instruments
were valued using market quotes. Long-term debt is classified
within Level 2. Fair value is provided for disclosure purposes
only.
Loan Commitments, Letters of Credit and Guarantees
The fair value of commitments, letters of credit and
guarantees represents the estimated costs to terminate or
otherwise settle the obligations with a third party. Other loan
commitments, letters of credit and guarantees are not actively
traded, and the Company estimates their fair value based on
the related amount of unamortized deferred commitment fees
adjusted for the probable losses for these arrangements.
These arrangements are classified within Level 3. Fair value is
provided for disclosure purposes only.
SIGNIFICANT UNOBSERVABLE INPUTS OF LEVEL 3
ASSETS AND LIABILITIES
The following section provides information on the significant
inputs used by the Company to determine the fair value
measurements of Level 3 assets and liabilities recorded at fair
value on the Consolidated Balance Sheet. In addition, the
following section includes a discussion of the sensitivity of the
fair value measurements to changes in the significant inputs
and a description of any interrelationships between these
inputs for Level 3 assets and liabilities recorded at fair value
on a recurring basis. The discussion below excludes
nonrecurring fair value measurements of collateral value used
for impairment measures for loans and OREO. These
valuations utilize third party appraisal or broker price opinions,
and are classified as Level 3 due to the significant judgment
involved.
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